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CPA Cindy
CPA Cindy , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 57
Experience:  15 years in public accounting (Big 4)
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Worker injured in a factory accident due to his negligence

Resolved Question:

1. In August, 2010 a worker was injured in the factory in an accident partially as the result of his own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Greer Co. on October 4, 2010. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount.
3. Quinn is involved in a pending court case. Peete’s lawyers believe it is probable that Quinn will be awarded damages of $1,000,000.
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.
Submitted: 6 years ago.
Category: Finance
Expert:  CPA Cindy replied 6 years ago.

The following is included in the FASB Accounting Standards Codification Manual, Section 450-25-2:

1. As this amount is reasonably possible but not probable, it should be disclosed, but not accrued.

2. As this is probable (the threshold for requiring a charge to income), an accrual must be recognized in the current period. As the amount is estimatable and no award is a better estimate, the low end of the range ($600,000) would need to be accrued for the period. If material, specific disclosure should be made.

3. As this is a gain contingency, it should not be accrued as income or disclosed.

Hope this helps.

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